On December 20, 2019, President Trump signed the Further Consolidated Appropriations Act, which included the Setting Every Community Up for Retirement Enhancement Act of 2019 (the “SECURE”). SECURE made changes that apply to retirement savings and employee benefits, some of which will be discussed herein.
Prior to SECURE, when individuals reached age 70 ½ they were required to begin taking annual distributions, known as required minimum distributions or “RMDs”, from their IRAs. Under SECURE, the age for one to begin taking RMDs has now increased to 72. Increasing the RMD age allows retirement funds to continue to grow tax deferred for a longer period of time. This applies to people who will be the age of 70 ½ after December 31, 2019 and who have a 401(a), 401(k), 403(b) and government 457(b) and/or a traditional IRA.
SECURE implemented a major change to distributions to non-spousal beneficiaries. Prior to SECURE, if you had an IRA that you left, for example to your children, those children were able to stretch the distributions out over their lifetimes, which meant smaller distributions for beneficiaries, especially for younger beneficiaries. Under the new rules, those children will have to take distributions of the full balance of the IRA within ten years. The required ten-year time frame will result in larger distributions, which means a larger tax liability, especially for younger people who may be in a higher tax bracket as they are in their prime earning years, coupled with the inability to continue taking advantage of tax deferred growth over their lifetimes.
Note that the ten-year rule does not apply to “eligible designated beneficiaries” (EDB), defined as a surviving spouse, disabled or chronically ill individual, an individual who is not more than ten years younger than the owner or a minor child of the account owner. With regard to a minor child, the ten-year rule does apply once the child attains the age of majority (18 years old in New York).
Another group of people affected by SECURE are those who have designated trusts as beneficiaries of their retirement accounts. If the beneficiary of such a trust does not qualify as an EDB, then the entire plan balance will have to be paid out by the tenth anniversary of the plan holder’s death. This results in limiting the deferral of taxes and protection of the asset to ten years. There is no required minimum distribution under the SECURE Act for inherited accounts until year ten. So, if your trust has language indicating that beneficiaries only have access to the RMDs, the trust can potentially hold up those retirement accounts for ten years before the beneficiary has any access to the money.
In other words, if the trust language nominates a non-EDB, then under the new rules, (since there is no RMD until year ten after the year of death), the IRA funds could be held up in the trust for ten years and then all be distributed as a taxable event at that time.
One piece of good news is that SECURE allows contributions to IRAs even after 72 if the individual is still a wage earner. This means that an individual can now contribute up to $7,000 as a deductible contribution to an IRA, as can the spouse, totaling $14,000 as a couple per year, if they meet certain requirements.
Another benefit for those saving for retirement is that SECURE adds an option for a 401(k) to purchase an annuity to help individuals meet their cash flow needs by having a steady income stream throughout retirement.
Finally, SECURE allows the use of 529 plan funds to pay off up to $10,000 of student loans. The $10,000 limit is a lifetime limit that applies to the beneficiary of the 529 plan, and each of his/her siblings. Therefore, for example, a parent with four children can take a $10,000 distribution to pay student loans for each child, for a total of $40,000 in this example.
It is absolutely imperative that everyone to revisits and reviews their retirement plans, beneficiary designations and trusts in order to minimize the negative implications of SECURE on your retirement and estate plans.
Ronald A. Fatoullah, Esq. is the founder of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts, wills, and real estate. Stacey Meshnick, Esq. is a senior attorney with the firm and oversees the Medicaid Department. The law firm can be reached at 718-261-1700, 516-466-4422, or toll free at 1-877-ELDER-LAW or 1-877-ESTATES. Mr. Fatoullah is also a partner advisor with Advice Period, a wealth management firm that provides a continuum of financial and investment advice for individuals and businesses, and he can be reached at 424-256-7273.